WHAT ARE NON-BANKING FINANCIAL COMPANIES?
Non-bank finance Companies (NBFC) a financial institutions under the Companies Act 1956. On NBFC we can rely on financial services, including lending and investment and products to customers but they do not have a bank license.
NBFC companies are composed of various entities such as insurance companies, pension funds, mutual funds, leasing companies, factoring companies, venture capital firms, hedge funds, and many more. Each of these institutions specializes in different areas of financial services, catering to specific needs and demands.
In this blog Learn and Understand the difference between a NBFC and a Bank
Difference between bank and NBFC
Whereas both banks and NBFC provide similar services they have differences between them such as,
Issuing Cheque:
NBFCs cannot issue Cheques to be drawn on themselves since they are not a part of the payment and settlement
Reserve Ratio Compliance:
Banks are legally encouraged to keep aside a percentage of the deposit as reserves, as per RBI standards. NBFCs are not subject to any such compliance obligations, nevertheless an ecosystem like banks.
Deposit Insurance:
Depositors are protected from losses in a situation where the bank collapses by insurance when they place their money with it. The money that NBFCs receive from depositors is not insured.
Demand Deposits:
Demand deposits are those that can be withdrawn without providing the financial institution any advance notice. It is an account holder’s current and savings account are accepted by banks, but not by NBFCs.
Services Offered by NBFCs
Similar to banks NBFC also provides certain services and products. They are listed below:
- Personal loans
- Home loans
- Vehicle loans
- Gold loans
- Microfinance
- Leasing and hire-purchase services
- Credit card services
- Insurance services
- Investment and asset management services
Types of NBFCs
In India, there are many different types of NBFCs that serve various sectors and requirements. The following are some of the well-known NBFCs:
Asset Finance Company (AFC)
These NBFCs provide financing for businesses to buy physical assets like vehicles, machinery, and equipment.
Investment Company (IC)
The only thing these NBFCs do is invest in assets, which include bonds, stocks, and other forms of debt.
Loan Company (LC)
Both people and companies can obtain loans and credit facilities from these NBFCs. The different types of loans include business, vehicle, and instant personal loans, among others.
Infrastructure Finance Company (IFC)
Transportation, telecommunication, and electricity infrastructure projects are funded by these NBFCs.
Microfinance Company (MFC)
These NBFCs offer small loans and other microfinance services to people and groups living in rural or semi-urban areas.
Functions of NBFC:
There are various roles played by Non-bank finance companies in the financial system which are more significant. The significant functions of NBFC are listed below:
Investment and Capital Formation:
Individuals and companies can invest their excess money on NBFC platforms. Financial Institutions like Zap Money provide a range of investment products, including securities, debentures, and bonds. Non-banking companies facilitate the mobilization of savings and direct them towards profitable ventures, which helps in capital formation—a crucial aspect of economic expansion. This system facilitates innovation, entrepreneurship, and the distribution of cash to profitable industries.
Intermediation:
NBFCs play a vital role in serving as an intermediary between individuals with excess funds and those in need of funding. They link borrowers and possible lenders, facilitating lending and borrowing activity. Non-banking financial companies frequently offer alternative funding sources, particularly for small and medium-sized enterprises (SMEs) that could have trouble getting loans from conventional banks. Financial services provided by non-banking financial services promote effective capital allocation and economic growth by acting as a link between investors and borrowers.
Risk Management:
In addition to providing a variety of risk management services, NBFCs are essential in preventing financial losses for both people and companies. For example, insurance companies offer protection against potential risks like accidents, natural disasters, health problems, and property loss. In order to lessen the effects of unanticipated disasters, they compensate policyholders for their losses. Moreover, NBFCs take part in hedging activities, which help people and companies control risks related to interest rates, exchange rates, and commodity prices. Non-banking financial services support financial stability and resilience by offering risk management solutions.
Read More:
Can we take a personal loan to build a home?
FAQ:
How do NBFCs make money?
NBFCs primarily earn income by charging interest on loans they provide. They may also earn fees for services like loan processing or account maintenance.
Are NBFCs safe?
The safety of your investment with an NBFC depends on the company’s financial health. Unlike banks, deposits with NBFCs are not insured by the government. It’s crucial to choose a reputable NBFC with a good credit rating
How are NBFCs regulated?
The Reserve Bank of India (RBI) regulates NBFCs in India. They set guidelines for operations, capital adequacy, and interest rate caps.
What are the benefits of using NBFCs?
NBFCs can offer faster loan approvals and more flexible terms compared to banks. They may also cater to niche markets underserved by traditional banks.
What are the disadvantages of using NBFCs?
Interest rates charged by NBFCs can be higher than those offered by banks. Deposits with NBFCs are not insured, and there’s a higher risk of defaults compared to banks.
